FEXCHANGE ORGANIZATION trading is, for the most part, a game for young people. However, find a veteran whose memory stretches beyond a couple of decades and he will tell you that there are really only two numbers that matter to the pound. These are 1.40 and 2.00, the border of the normal trading range against the US dollar. Since 1985, when he reached one of them, there has been a turning point (see diagram).
This was until June 2016, when the UK vote to leave the European Union led to a drop in the pound sterling. Since then, radioactive fallout has kept him there. Political headlines have become a consistent predictor of fluctuations in the pound’s exchange rate, prompting comparisons with emerging markets. Foreign investors looked at British assets with disgust, fearing that they were valued in a currency that could fall further if the most devastating version of Brexit is implemented. Those looking to hedge against this risk have found it getting more expensive as speculators are betting that the pound will fail again.
In reality, the massacre did not take place. Although a trade deal signed between the UK and European Union Excluding funding in favor of fisheries, the transition ended more orderly than many feared. As the deal got closer, rates against the pound began to decline, making it cheaper for foreign buyers to hedge their currency exposure on sterling assets. Foreign investors, more than ever, again flowed into gilts (British government bonds), having bought a record 89.8 billion pounds sterling (127.4 billion US dollars) from them in the year to April 2021. The pound even traded above $ 1.40 last month.
The foreign enthusiasm for pigs is not just due to the revival of the pound. The rapid introduction of the vaccine indicates a faster recovery from the COVID-19 pandemic in the UK than anywhere else in Europe. This, combined with the fact that the Bank of England is generally perceived to be more aggressive than the European Central Bank, means that the UK government debt rate is comparatively attractive. “When people look at French 0.17%, it becomes easier to sell pigs at 0.81% yield,” says Keith Jukes of Société Générale Bank.
Political risk remains, especially in the form of the looming struggle for the future of Scotland. But the fiscal impact of Scotland’s exit on the rest of Britain will be moderate and positive. In the 2019-20 tax year, Scotland accounted for 9.2% of total UK government spending and about 8% of tax revenue. And some of that income is likely to be saved as financial firms, now headquartered in Edinburgh, have moved to London. “Take away Scotland and the rest United Kingdom comes out of the budget deficit of about 2% of Gdp to about 1.5%, ”says Thomas Pugh of Capital Economics, a consulting firm.
Not everything will go smoothly in the coming months. The squabble between Westminster and Brussels over the imposition of trade rules in Northern Ireland threatens to renew the disputes that led to the agreement to withdraw from Brexit. This will hurt the UK’s trade prospects. Meanwhile, the Treasury Department plans to give the government a veto on stock exchange listings for reasons of national security, which could reduce the attractiveness of the country’s financial markets to foreign companies. But for now, it looks like the money will continue to flow. “We still value the constant uselessness United Kingdom– says Mr. Jukes. “There must be an opportunity.” ■
This article appeared in the UK section of the print edition under the heading “Golden Pleasure”.